Lawsuit shows new risk from competitors

A lawsuit involving two rival health systems, with one alleging that the other overcharged Medicare by at least $280 million, might portend more such situations in which a competitor throws a healthcare provider to the auditor wolves.

Tenet Healthcare Corp. in Dallas recently accused Community Health Systems (CHS) in Franklin, TN, of overcharging Medicare at least $280 million in a lawsuit intended to block the unsolicited bid from CHS. After the lawsuit was filed, CHS announced that it had withdrawn its offer to acquire all of the outstanding shares of common stock of Tenet and also had withdrawn its nominees for election to Tenet's Board of Directors.

Tenet had rejected an unsolicited bid from CHS in December 2010. When CHS persisted in attempts to take over the company, Tenet filed the lawsuit in U.S. District Court in Dallas accusing the company of using "liberal" criteria to decide whether to admit a patient or treat the person less expensively on an outpatient basis. CHS could be "subject to liability and damages of well over $1 billion" for improper Medicare admission practices from 2006 and 2009, Tenet alleged in the suit. Soon after the lawsuit was filed, CHS shares dropped 36%, raising questions about the company's ability to raise the cash for its proposed $7.3 billion takeover of Tenet.

The Tenet lawsuit says CHS' rate of keeping patients on an observational basis was less than one-half of Tenet's rate of 12.06% or of the national average of 12.60%. Data developed by consultants hired by Tenet showed CHS' outpatient rate was 5.11%, according to the lawsuit.

"We filed this complaint because our due diligence revealed that Community Health has been systematically overbilling Medicare and likely other payers by causing patients to be admitted to its hospitals when industry practice is to treat them in outpatient observation status," Tenet said in a statement provided to Healthcare Risk Management. "We believe this unsustainable strategy has resulted in Community Health overstating its inpatient admissions, revenues and profits and has created substantial financial and legal liability. We are seeking to provide Tenet stockholders with the information they need to make an informed decision by asking the court to compel Community Health to correct its false and misleading statements and omissions."

Suit can lead to federal scrutiny

Tenet seeks to compel CHS to disclose how it admits patients to hospitals for "financial rather than clinical purposes," according to the lawsuit. By exposing the supposed compliance issue, Tenet seeks to tell its shareholders that CHS is not as profitable as it claims to be, thereby discouraging them from approving the takeover, explains Douglas B. Swill, JD, a partner with the law firm of Drinker Biddle in Chicago and chair of the firm's Health Law Practice Group.

Regardless of how the takeover bid turns out, the charges might open CHS, the second-largest publicly traded U.S. hospital operator, to federal scrutiny, Swill says.

"This is quite remarkable because we already see a lot of enforcement and compliance activity at the federal level, and with whistleblowers, and this a new development where you have a party to a transaction that has access to the other party's data through due diligence," Swill says. "Tenet was using information about the status of CHS' patients and concluded that it was maximizing reimbursement by taking what should be observation patients and converting them to admissions. That has the effect of increasing reimbursement by about $7,000 per patient with Medicare alone."

CHS released a statement calling Tenet's allegations "baseless." The company also stated that investment bankers had reaffirmed their confidence in financing the transaction. "Its actions today prove that Tenet has adopted a 'scorched earth' defense without regard for the best interests of shareholders," the company statement said. "These self-serving allegations are an attempt by Tenet's management and board to continue their entrenchment strategy and to distract Tenet shareholders from CHS' pending offer."

Unheard of in healthcare industry

The lawsuit also claims that one year after CHS acquired another hospital system in 2007, that system had a 52% drop in its observation rate. Swill says that change, if accurate, is "stunning."

Such lawsuits, challenging a corporation that is attempting a takeover, are not uncommon in other industries but are unheard of in healthcare, says Sheryl R. Skolnick, PhD, senior vice president of CRT Capital Group in Stamford, CT. Skolnick is an analyst for Wall Street and has studied Tenet for the past 20 years. In addition, she says, the fraud component of this lawsuit is unusual for any industry. "We see suits involving company secrets and unfair competition, but we rarely see lawsuits in which the request disclosure is essentially, 'Why don't you fess up that you've been committing fraud?'" Skolnick says. "It's not a step that I think Tenet would have taken lightly."

The Tenet lawsuit might have far reaching implications for all healthcare providers, Swill says. It might signal that corporate leaders are more willing to play hard ball when it comes to unwanted bids, even if that means alerting regulators and auditors to the questionable practices of a competitor. "This case puts what otherwise might be a whistleblower-type lawsuit, or a government investigation, into a new arena of risk arising from a corporate transaction," he says. "We're seeing lots of corporate transactions now, and they have to include disclosures to comply with the Securities and Exchange Commission rules. That means competitors have access to data that may lead them to make charges like this to either discourage the takeover or to obtain further information."

[For more information about the lawsuit, see the April 15, 2011, issue of Healthcare Risk Management Alert. To sign up for this free weekly ezine, contact customer service at (800) 688-2421 or]


Sheryl R. Skolnick, PhD, Senior Vice President, CRT Capital Group, Stamford, CT. Telephone: (203) 569-4359. E-mail:

Douglas B. Swill, JD, Partner, Drinker Biddle, Chicago. Telephone: (312) 569-1270. E-mail: